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Fighting Inflation via a Tax Incentive Is Regressive

Updated: Mar 19

What issues are raised when increasing savings using a simple tax incentive?


With inflation the highest it has been since the 80s, people are worried about their financial strategies. In this novel time, policymakers are fervently trying to address the many factors affecting our economy and the individuals in it. Whether excessive demand, increased money supply or both are the cause, economists observe that inflation makes people act in semi-predictable ways. Since people become anxious about the decrease in the value of their dollar, they find it rational to spend the money that they have before the price of goods becomes more expensive.


The data gives credit to this, as personal consumption has continued to increase through this recent period of higher inflation in 2022. Consumption intuitively leads people to cut into their savings, causing a significant decrease in the savings rate, as recorded by Federal Reserve Economic Data. Immediately, policymakers and voters may see this and think that, in order to help fight inflation, a simple savings incentive might be an effective option. It could be used to increase savings that would, in turn, lower consumption and help put downward pressure on prices while also putting more money in the bank for people as a bonus. Win-win, right? Traveling a little farther down this path helps reveal the issue of increasing savings using a simple tax incentive. 


A simple tax incentive occurs when the government decides that people pay less in taxes later on the money they put into the bank now. In order to assess the theory behind this policy’s plausibility, it is important to look at who is most likely to save already. In a country that had a vast majority of people (69%, according to a GOBankingRates’ savings survey reported on by Cameron Huddleston) holding onto less than a thousand dollars in their bank accounts in 2019, it becomes apparent that a disproportionate benefit from tax incentives would fall onto the most affluent in society, as stated by Yahoo Finance.


Coupled with the downward turn in financial markets, more affluent people are already finding it more attractive to have their money in the bank with an assured interest rate, as opposed to placing it in the stock market, considering its volatility. These tax incentives would create a double incentive for those more affluent to save, bolstering their accounts, and for poorer people, who have a shrinking amount of disposable income, to allot savings to receive the least.  


For the same reasons that make simple tax incentives on savings a regressive policy, policymakers should be conscious of not incentivizing savings using tax shelters as a method of tampering with inflation in the post-pandemic era. They should instead focus on bringing down the price of gas and energy, the largest contributor to inflation (according to data from the U.S. Bureau of Labor Statistics), using foreign policy shifts or incentivizing more reliable and sustainable energy-producing methods. There is more uncertainty ahead and finding out what doesn’t work is equally important as finding out what does.  


The opinions expressed in this article are those of the individual author.


Sources:


“Databases, Tables & Calculators by Subject.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths.


Huddleston, C., 2019. “Survey: 69% of Americans Have Less Than $1,000 in Savings.” Yahoo. www.yahoo.com/video/survey-69-americans-less-1-171927256.html> Accessed 10 October 2022.


U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PSAVERT, October 10, 2022.

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